Finally, China undervalues its currency, the renminbi, to promote exports and deter imports.
As with Japan in its boom years, China is too wedded to investment and exports. Distortions feed on themselves. Consider housing. Denied adequate returns on their savings, many Chinese invest in real estate, driving prices up and prompting fears of overbuilding and a "bubble."
China is at a crossroads. Rapid economic growth underlies the regime's legitimacy at home and its power abroad. But rapid growth is imperiled. China's leaders acknowledge the problem. Their latest effort to fix it occurred at the recent "third plenum" of the 18th Communist Party conference, which — among other things — relaxed the one-child per couple restriction and provided farmers more freedom to dispose of their land.
"The [communique's] most telling statement was that market forces would begin to play a 'decisive' role in allocating resources," says economist Nicholas Lardy of the Peterson Institute, whose earlier book "Sustaining China's Economic Growth After the Global Financial Crisis" also found the traditional economic model outdated.
Taken literally, the communique implies that China will soon deregulate interest rates, float the exchange rate, end energy subsidies and curb state-owned enterprises. No one expects this; many policy proposals are vague.
Here's the dilemma: The old model may not be sustainable, but getting to a new model may be painful. Higher interest rates could bankrupt some firms dependent on cheap credit. A revalued renminbi could close some export companies. Stronger consumption might not instantly fill the void. Naturally, those benefiting from the status quo will fight to preserve it.
This defines China's predicament. In 2012, its economy grew a respectable 7.7 percent. With good policies, Lardy thinks something like this could continue. Pettis sees a harder transition. At best, growth will average 3 percent to 4 percent. That's not much higher than the United States'. China remains a colossus, but its future is increasingly clouded.
Samuelson writes for The Washington Post Writers Group.